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Suddenly having to part with a large amount of money can make a huge negative impact on a savings plan. If you've established some long-term investments, then an emergency arises and you need to withdraw investment money to cover that, then you a likely to lose out. So, you need to establish an account where you can accumulate a reasonable amount of cash to have in reserve for the inevitable unforseen circumstance. Your emergency fund should contain three months' worth of living expenses. The amount does not have to equal three months’ worth of your salary, but only what you need to pay the rent or mortgage, repay debt, buy food and make the car payment. While you're at it, you should also set up a basic record-keeping system using a personal finance program like Microsoft Money. Emergency money must be accessible. Of course, therein lies a danger. If you’re not disciplined, you can easily tap into it for impulse purchases, like weekend vacation trips and new ski equipment. This money, however, should exist for medical bills, brakes for the car, a spell of unemployment and the like. If there's talk of layoffs at work, increase the amount you put into it. When you must use money from this fund, make repaying it your top priority. Put your emergency money in a highly liquid account, such as a saving account or money market account, which pays higher interest rates. Tip: Wherever you open an emergency fund, persuade your banker to eliminate any account maintenance fees, which can run as high as $100 a year or more. In most cases, you can automatically eliminate these fees by maintaining a minimum balance. Look for a bank or credit union that uses an average daily balance method for computing this rather than a minimum daily balance. The latter will charge a fee if your account falls below the minimum on just one day. You can also avoid a fee by linking a checking account to a savings account or an interest-bearing checking account. Once you have built up a three-month cushion, you can also consider putting a portion of it into a certificate of deposit, or CD, to earn a higher interest rate. The longer the term of the CD, the higher the rate. But if you lock up your money for too long, you've defeated the purpose of easy access. Once you've got your emergency fund in place, then you're ready to invest. Develop a 3-Tiered Investment strategy - Mutual funds, DRIPS, and Individual Growth Stocks. As Naylor points out, a 3-tiered investment strategy emphasises diversification and is flexible enough to accommodate your individual comfort level, that is, your tolerance for risk. It also allows you to decide how much of your financial planning you can do for yourself, and how much you'll need to rely on expert advice. The three tiers that Naylor discusses represent three strategies with increasing levels of risk and required knowledge. Mutual funds should give your financial strategy some stability and allow you the convenience of having your portfolio of investments professionally managed. Stocks that pay dividends and offer Dividend Reinvestment Programs (DRIPs) represent the next tier, and hopefully the price of a stock will increase along with the dividends each year. The third tier of investments - Individual Growth Stocks - exploit a greater knowledge of, and familiarity with buying individual stocks.
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